Economics 2.0

Via According To Julie (which is a fantastic blog written by the daughter of a great IT professor who once taught me), here is the most stunning example of Economics 2.0. A coffee shop where the punters decide what to pay (LINK to Seattle Times article):

With its blood-red walls and black leather sofas, Kirkland's Terra Bite Lounge looks like any other coffee shop — until you get to the menu. There are no prices listed. Terra Bite doesn't have them.

You read that right: No prices. Customers pay what and when they like, or not at all — it makes no difference to the cafe employees, who are instructed not to peek when people put money in the metal lock box.

Julie has two posts on the subject which are both worth reading (POST 1, POST 2). As she points out, "Using a strict rational choice economic model, no one would pay ... However, the average price of coffee (or a "transaction" which could be anything from an espresso to a double mocha with a cookie and a bagel) is 3 dollars."

This is the start of a big paradigm shift for micro-economic theory, which affects the way we all consume, and ultimately live.

Everyone has their own theory as to why this works, but I have a feeling this is brought about by the same cultural shift open-source technology and the internet is responsible for. It's not a matter of guilt, neither is it a matter of the consumer becoming more generous; instead, this is an example of the consumer becoming more accustomed/educated to a world in which he or she takes responsibility for the longevity of the products and services he or she enjoys.

This is an extension of Apple's idea to start selling music online. The critics who asked "why would anyone buy it online when they can get it for free elsewhere?" missed the point, as pornography barons pointed out. People want to keep something in business that they like. People, through the advent of technology, have been conditioned to the fact that they have to contribute if they want to keep something in existence that they like. In fact, it's the business model of the blogosphere, where people donate to their favorite bloggers and click on their ads in order to keep them in business.

It's a new spin on the old adage: "if people like what you're doing, they will come back." However, instead of forcing the consumer to accept the same pricing-scheme day-in, day-out, you're just letting them choose how much/when instead. It's no different to the "3-for-1" deals you see everywhere, except you let your customers decide when they get their "1". And ingeniously, the customer trusts you, and hence likes you, better than anyone else.

This is the paradigm shift in micro-economics we are seeing everywhere right now, for which technology is principally responsible, and as people become more accustomed to the new business model, they act more responsibly, and you're more likely to see more of these kinds of business models around.

It's about choice and trust. You keep the same economic principles in place as you had before, but you apply them in a way that leaves more choice for and trust in the individual. In other words, you let your customers become your sponsors.

Comments

[johnshade]

Sounds like public broadcasting pledge week. Nothing new under the sun....

[Mark]

I wonder if the company pays income taxes on what it gets? It could be argued that it is the mutual exchange of gifts.